Investment and development activity responds to record occupancy rates.

The hotel sector has outperformed other commercial property assets over the past 3 years. This strong performance has started to stabilise and over the year to December 2012, total returns fell behind those of the office and industrial sectors.

This softening reflects more modest income growth across the eastern seaboard. Despite this, investment demand remains strong with purchasers from Asia dominating transactions at the top end. Smaller assets, particularly in regional areas, are likely to continue to be snapped up by private buyers seeking higher returns or the opportunity to add value.

Sentiment toward the Australian hotel market remains positive underpinned by growing regional demand for leisure tourism and the steady expansion of business travel. A number of large international hotel companies have recently announced plans to target the Australian market, looking to open new hotel brands here. Despite the stability and transparency of the Australian market, barriers to entry include the high Australian Dollar and the strength of local operators.

International visitor arrivals accelerated strongly in 2012, to be up 4.6%, with over 6.1 million visitors to Australia during the year. Arrivals have grown strongly from China, Malaysia, Singapore and Hong Kong. Domestic travel by Australians also accelerated in 2012, particularly to Western Australia and Queensland. With the Australian Dollar remaining strong, outbound travel by Australian residents continues to outpace growth in international visitor arrivals and domestic travel however; the pace of growth has slowed.

High occupancy rates have driven the announcement of a number of major hotel developments. As a result, an increase in supply levels is anticipated over the medium-term. This new supply is expected to both absorb excess demand and meet new accommodation requirements, and is not likely to significantly affect occupancy rates or diminish market growth rates. New hotels are a key component of major waterfront developments in Perth and Sydney.

Major Hotel Sales in Australia

During the year ended December 2012, there were 6.1 million visitors to Australia, showing an increase of 4.6% from 2011. New Zealand continues to be the largest source of international visitors to Australia, followed by China, the United Kingdom and the USA. While only accounting for a small portion of overall visitors (23,600) to Australia, arrivals from Malaysia grew by 20.7% over 2012. Strong growth in visitors from Singapore (+14.4%) and China (+10.2%) was also recorded during 2012.

The main reason for visiting Australia remains holidaying, which accounts for 44% of all arrivals. Of all visitors to Australia during 2012, 51% visited New South Wales, 35% visited Queensland, and 32% visited Victoria. International visitors spent a total of $18.9 billion within Australia during the year ended December 2012, an increase of
5% over the previous year.

Domestic travel by Australian's also increased over 2012, with 74.5 million overnight trips taken in Australia by residents, reflecting an increase of 4% over the equivalent period in 2011. Two-thirds of visitors travelled within their state or territory of residence, the remainder travelled interstate. New South Wales received the most visitors (33%) followed by Queensland (24%) and Victoria (20%). Expenditure by domestic visitors amounted to $50 billion during 2012, an increase of 3% compared with the same period in 2011.

Buoyed by the continued strength of the Australian Dollar, outbound travel by Australians increased by 5.4% during 2012, outstripping the growth in international visitor arrivals and domestic travel by Australian residents. However, the pace of growth has slowed from the double-digit growth recorded in recent years, and is expected to moderate further as the Australian Dollar recedes from its current heights. Australians took over 8.2 million international trips in 2012. The most popular international destination was New Zealand, followed by Indonesia, the USA, Thailand and the United Kingdom.

Total hotel sales activity for 2012 was in excess of $1.250 billion (excluding the successful float of the Ascendas Hospitality Trust), showing an increase of 30% on the total value for 2011. Transaction activity during 2012 was the strongest since 2007, reflecting interest from global institutional investors focusing on the Australian tourism and hospitality sector.

Investors from Asia, who accounted for over 70% of all sales with investors from Malaysia, Hong Kong and Singapore the most prevalent, dominated purchasing activity. Vendors of hotels across 2012 were predominantly Australian institutions. The largest single hotel asset transaction of 2012 was the sale of the Shangri-La Hotel in Sydney for $330 million. Hong Kong based Shangri-La purchased the hotel from the Government of Singapore Investment Corporation (GIC).


Sydney International Convention, Exhibition & Entertainment Precinct Master Plan.
Planning application due in mid-late 2013.

There were also a number of large portfolio transactions during the year, reflecting Australian institutional investors departing the sector. The largest hotel transaction during 2012 was the transfer in ownership of the Mirvac Wholesale Hotel Fund to a group of investors headed by the Singapore institution Ascendas.The largest purchase by a single group in 2012 was the portfolio of three Marriot Hotels for approximately $415 million by the Malaysian Starhill REIT; the vendor was Commonwealth Managed Investments.

The largest hotel sale in Western Australia also occurred during 2012, with Primewest Management's purchase of the Esplanade Hotel Fremantle for $88.5 million. The sale was also the largest purchase by an Australian investor during 2012.

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